Question

Use the estimated elasticities in Table 7–4 to calculate the Rothschild index for each industry. Based on these calculations, which industry most closely resembles perfect competition? Which industry most closely resembles monopoly

mela the demand stry demand). Her at individual firm's na Table 7-4 provides al gives the ow or a given industry, ta industry quantity increase. The third co bran individual firm Now responsive the As product is to a od How much more elastic is the demand for m's product compared to that for the market? rovides an answer to this question. The second the own price elasticity of the market demand ustry. This elasticity measures how responsive quantity demanded is to an industrywide price third column provides the elasticity of demand dual firm's product. Thus, that column measures asive the quantity demanded of an individual voduct is to a change in that firm's price. to a 1.8 percent reduction in the total quantity demanded of agricultural products. In contrast, the elds untural products. In contrast, the elasticity of demand for a representative firm's product is -96.2. If an individual firm raised its price by 1 percent, the quantity demanded of demanded of the firm's product would fall by a whopping 96.2 percent. The demand for an individual agriculto firm's product is very elastic indeed because there are numerous firms in the industry selling close substitutes. The more competition among producers in an indus try, the more elastic will be the demand for an individud firm's product Table 7-4 and Representative Firm Demand Elasticities for Selected U.S. Industries Own Price Elasticity of Market Demand -1.8 -1.0 Industry Agriculture Construction Durable manufacturing Nondurable manufacturing Transportation Communication and utilities Wholesale trade Retail trade Finance Services Own Price Elasticity of Demand for Representative Firm's Product -96.2 -5.2 --- 3.5 -3.4 -1.9 -0.1 1.2 -1.8 -5.5 --26.4 Source: Matthew D. Shapiro, "Measuring Market Power in U.S. Industry." National Bureau of Economic Research, Working Paper No. 2210.1987.

Answer 1

The Rothschild indices are calculated by dividing the own price elasticity of market demand by the own price elasticity of demand for a representative firm's product for each industry. Performing that calculation results in the following Rothschild index numbers:

Agriculture: 0.019 ( 1.8 / 96.2 )

Construction: 0.192 ( 1 / 5.2 )

Durable manufacturing: 0.400

Non durable manufacturing: 0.382

Transportation: 0.526

Communication and utilities: 0.667

Wholesale trade: 0.938

Retail trade: 0.667

Finance: 0.018

Services: 0.045

Based on the Rothschild indices above, wholesale trade (0.938) most closely resembles a monopoly, while finance (0.018) most closely resembles perfect competition.